Helen of Troy(HELE) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Helen of Troy reported Q1 FY24 net sales of $474.7 million, with increased operating income and strong cash flow from operations Condensed Consolidated Statements of Income (Unaudited) | (in thousands, except per share data) | Three Months Ended May 31, 2023 | Three Months Ended May 31, 2022 | | :--- | :--- | :--- | | Sales revenue, net | $474,672 | $508,078 | | Gross profit | $215,631 | $211,171 | | Operating income | $40,641 | $33,939 | | Net income | $22,581 | $24,595 | | Diluted EPS | $0.94 | $1.02 | Condensed Consolidated Balance Sheets (Unaudited) | (in thousands) | May 31, 2023 | February 28, 2023 | | :--- | :--- | :--- | | Total assets, current | $856,057 | $892,041 | | Goodwill | $1,066,730 | $1,066,479 | | Total assets | $2,872,828 | $2,913,715 | | Total liabilities, current | $440,791 | $412,158 | | Long-term debt, excluding current maturities | $830,922 | $928,348 | | Total liabilities | $1,357,920 | $1,424,904 | | Total stockholders' equity | $1,514,908 | $1,488,811 | Condensed Consolidated Statements of Cash Flows (Unaudited) | (in thousands) | Three Months Ended May 31, 2023 | Three Months Ended May 31, 2022 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $121,056 | ($38,428) | | Net cash used by investing activities | ($11,631) | ($222,509) | | Net cash (used) provided by financing activities | ($99,629) | $276,810 | Note 1 - Basis of Presentation and Related Information The company operates two segments, Home & Outdoor and Beauty & Wellness, following a Q4 FY23 restructuring - As of May 31, 2023, the company operates two reportable segments: Home & Outdoor and Beauty & Wellness[19] - The Beauty & Wellness segment was formed in Q4 fiscal 2023 by combining the previous Health & Wellness and Beauty operating segments as part of a global restructuring plan[19] Note 3 - Acquisition of Curlsmith The company acquired Curlsmith for $147.9 million in April 2022, recognizing $117.1 million in goodwill - Completed the acquisition of Recipe Products Ltd. (Curlsmith) on April 22, 2022[32] Curlsmith Acquisition Details | Metric | Value (in millions) | | :--- | :--- | | Total Purchase Consideration | $147.9 | | Goodwill Recognized | $117.1 | | Trade Names (20-year life) | $21.0 | | Customer Relationships (19.5-year life) | $12.0 | - From its acquisition date through May 31, 2022, Curlsmith contributed $3.2 million in net sales and $0.4 million in net income[36] Note 7 - Restructuring Plan The company's 'Project Pegasus' restructuring targets $75-85 million in annualized profit improvements by FY2026, with $7.4 million in Q1 FY24 charges - Project Pegasus targets annualized pre-tax operating profit improvements of approximately $75 million to $85 million, expected to be substantially achieved by the end of fiscal 2026[51] - Total one-time pre-tax restructuring charges are estimated to be between $85 million and $95 million[51] Project Pegasus Restructuring Charges (Q1 FY24) | (in thousands) | Amount | | :--- | :--- | | Total restructuring charges | $7,355 | | Severance and employee related costs | $892 | | Professional fees | $5,626 | | Total incurred since inception | $34,717 | Note 8 - Commitments and Contingencies The company faces ongoing patent litigation with Brita LP over PUR water filtration systems, with an ITC decision expected by September 2023 - Brita LP filed a patent infringement complaint against the company related to PUR gravity-fed water filtration systems[54] - The ITC issued an Initial Determination against the company, which is under review, with a final decision expected by September 19, 2023[54] EPA Compliance Costs | (in thousands) | Three Months Ended May 31, 2023 | Three Months Ended May 31, 2022 | | :--- | :--- | :--- | | Total EPA compliance costs | $0 | $11,644 | Note 9 - Long-Term Debt Total long-term debt decreased to $837.2 million as of May 31, 2023, with a weighted average interest rate of 6.8% Long-Term Debt Summary | (in thousands) | May 31, 2023 | February 28, 2023 | | :--- | :--- | :--- | | Revolving loans | $594,000 | $690,000 | | Term loans | $245,312 | $246,875 | | Total long-term debt | $837,157 | $934,412 | - The weighted average interest rate on borrowings was 6.8% as of May 31, 2023, up from 6.6% as of February 28, 2023[61] - As of May 31, 2023, the company had $637.8 million available for revolving loans under its Credit Agreement[65] Note 13 - Segment Information In Q1 FY24, Home & Outdoor net sales were $217.1 million and Beauty & Wellness net sales were $257.5 million, with both segments experiencing sales declines Segment Performance (Three Months Ended May 31, 2023) | (in thousands) | Home & Outdoor | Beauty & Wellness | Total | | :--- | :--- | :--- | :--- | | Sales revenue, net | $217,144 | $257,528 | $474,672 | | Operating income | $22,116 | $18,525 | $40,641 | Segment Performance (Three Months Ended May 31, 2022) | (in thousands) | Home & Outdoor | Beauty & Wellness | Total | | :--- | :--- | :--- | :--- | | Sales revenue, net | $234,263 | $273,815 | $508,078 | | Operating income | $29,793 | $4,146 | $33,939 | Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 FY24 consolidated net sales declined 6.6% due to organic business softness, while operating margin improved to 8.6% and operating cash flow was $121.1 million Overview Helen of Troy is a global consumer products company in Phase II of its transformation, focusing on Leadership Brands and 'Project Pegasus' for margin expansion - The company operates two segments: Home & Outdoor and Beauty & Wellness[92][93] - Phase II of the company's transformation focuses on organic sales growth, margin expansion, and strategic capital deployment, with an emphasis on Leadership Brands[94] - Project Pegasus is a global restructuring plan intended to expand operating margins through initiatives designed to improve efficiency and reduce costs[95] Significant Trends Impacting the Business Key trends include 'Project Pegasus' workforce reduction, ongoing Brita patent litigation, macroeconomic pressures, and increased online sales to 26% of total revenue - Project Pegasus will reduce the global workforce by approximately 10% and targets $75-$85 million in annualized pre-tax operating profit improvements[99][100] - The company faces patent litigation from Brita LP regarding its PUR water filtration systems, with a final ITC decision expected by September 19, 2023[104] - Online sales grew to approximately 26% of total consolidated net sales revenue for the quarter, an 8% increase from the prior year[109] Results of Operations Q1 FY24 consolidated net sales declined 6.6% to $474.7 million, while gross margin improved to 45.4% and operating income rose 19.7% despite higher interest expense Net Sales Revenue Change (Q1 FY24 vs Q1 FY23) | Category | % Change | | :--- | :--- | | Total net sales revenue | (6.6)% | | Organic business | (7.7)% | | Acquisition (Curlsmith) | 1.2% | | Impact of foreign currency | (0.1)% | - Gross profit margin increased 3.8 percentage points to 45.4%, primarily due to the favorable comparative impact of prior year EPA compliance costs, a more favorable product/customer mix, and lower inbound freight costs[137][139] - SG&A ratio increased to 35.3% from 34.9%, driven by a $4.2 million charge for the Bed, Bath & Beyond bankruptcy and the unfavorable leverage from lower sales[138][140] - Interest expense increased significantly to $14.1 million from $4.4 million due to higher average interest rates[152] GAAP vs. Non-GAAP EPS | (per share data) | Three Months Ended May 31, 2023 | Three Months Ended May 31, 2022 | | :--- | :--- | :--- | | Diluted EPS (GAAP) | $0.94 | $1.02 | | Adjusted Diluted EPS (non-GAAP) | $1.94 | $2.41 | Liquidity and Capital Resources The company generated $121.1 million in operating cash flow in Q1 FY24, enabling $99.6 million in debt repayment and strengthening liquidity - Operating activities provided net cash of $121.1 million for the quarter, compared to a use of $38.4 million in the prior year, primarily due to decreases in cash used for inventory and accounts receivable[164] - Investing activities used $11.6 million, a significant decrease from $222.5 million in the prior year, which included the Curlsmith acquisition and higher capital expenditures for a new distribution facility[165] - Financing activities used $99.6 million, primarily for net repayments on revolving loans under the Credit Agreement[166] - As of May 31, 2023, the company had $38.9 million in cash and cash equivalents and $637.8 million available for borrowings under its Credit Agreement[159][170] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk disclosures were reported since the last Form 10-K, with foreign currency and interest rate volatility remaining key risks - There have been no material changes in the information provided in the section entitled 'Quantitative and Qualitative Disclosures about Market Risk' in our Form 10-K[176] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of May 31, 2023, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of May 31, 2023[178] - No change in internal control over financial reporting was identified during the fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal controls[179] PART II. OTHER INFORMATION Legal Proceedings No material changes in legal proceedings were reported since the last Form 10-K, except for updates on the Brita LP patent litigation in Note 8 - There have been no material changes in legal proceedings from those disclosed in the Form 10-K, except as updated in Note 8 regarding the Brita patent litigation[180] Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K were reported - Since the filing of our Form 10-K, there have been no material changes in our risk factors from those disclosed therein[181] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased shares under a $500 million authorization, with $399.2 million remaining available as of May 31, 2023 - The Board of Directors authorized a repurchase of up to $500 million of common stock, effective August 25, 2021, for a three-year period[182] Share Repurchase Activity (Q1 FY24) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | March 2023 | 8,723 | $110.30 | | April 2023 | 190 | $90.01 | | May 2023 | 35,719 | $97.05 | | Total | 44,632 | $99.61 | - As of May 31, 2023, $399.2 million remained available for repurchase under the current authorization[44][183] Exhibits This section lists exhibits filed with the Form 10-Q, including employment agreements, CEO/CFO certifications, and iXBRL financial statements - Exhibits filed include an employment agreement, CEO/CFO certifications (Rule 13a-14(a) and Section 906), and financial statements in iXBRL format[185]